Question

Write a 1,050- to 1,400-word paper that addresses the following scenario and questions:

Your aunt recently received the annual report for a company in which she has invested. The report notes that the statements have been prepared in accordance with "generally accepted accounting principles." She has also heard that certain terms have special meanings in accounting relative to everyday use. She would like you to explain the meaning of terms she has come across related to accounting.

• Go to the FASB website and access the FASB Concepts Statements and use the IASB website to respond to the following items. (Provide paragraph citations.) When you have accessed the documents, you can use the search tool in your Internet browser.
• Explain how "materiality" is defined by both FASB and IASB.
• The concepts statements provide several examples in which specific quantitative materiality guidelines are provided to firms. Identity at least two of these examples. Do you think the materiality guidelines should be quantified? Why or why not?
• The concepts statements discuss the concept of "articulation" between financial statement elements. Briefly summarize the meaning of this term and how it relates to an entity's financial statements.

Answer 1

Explain how "materiality" is defined by both FASB and IASB

• FASB Definition of Materiality:

“The two changes to our Conceptual Framework will help the Board identify and evaluate disclosure requirements in accounting standards and clarify the concept of materiality,” said FASB Chairman Russell G. Golden. “Meanwhile, the new standards improve fair value and defined benefit disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements, and adding relevant disclosure requirements.”

A new chapter in the Conceptual Framework on disclosures.
The chapter explains what information the Board should consider including in notes to financial statements by describing the purpose of notes, the nature of appropriate content, and general limitations. It also addresses the Board’s considerations specific to interim reporting disclosure requirements.

An update to an existing chapter of the Conceptual Framework for its definition of materiality.
The amendment aligns the FASB’s definition of materiality with other definitions in the financial reporting system. The materiality concepts will now be consistent with the definition of materiality used by the U.S. Securities and Exchange Commission, the auditing standards of the Public Company Accounting Oversight Board and the American Institute of Certified Public Accountants, and the United States judicial system.

An ASU on Fair Value Measurement disclosure requirements.
The standard improves the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments are effective for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.

An ASU on Defined Benefit Plan disclosure requirements.
The standard improves disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments are effective for fiscal years ending after December 15, 2020, for public companies, and for fiscal years ending after December 15, 2021, for all other organizations. Early adoption is permitted.

• IASB clarifies definition of ‘material’:

  The definition of materiality is a crucial element in accounting because it helps companies decide whether information is important enough to be included in their financial statements. To clarify the definition, the IASB amended IAS 1, Presentation of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

  Under the new definition, information is material if omitting, misstating, or obscuring it could reasonably be expected to influence the decisions that the primary users of general-purpose financial statements make on the basis of those financial statements, which provide financial information about a specific entity.

  The old definition stated that omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements.

  The IASB updated the definition because some companies had difficulty using the old definition. The amendments are intended to clarify both the definition of material and how the definition should be applied. The explanations that accompany the definition have been changed with the intent of providing more clarity, and the amendments are intended to ensure that the definition of material is consistent across all IFRS.

  The changes take effect on Jan. 1, 2020, but early application is permitted.

The concepts statements provide several examples in which specific quantitative materiality guidelines are provided to firms. Identity at least two of these examples. Do you think the materiality guidelines should be quantified? Why or why not?

Example 1 : Separate Disclosure of B/S items- if 10& or more of their immediate category of more than 5% of total assets.

Example 2: Receivables from officers and stockholders -Disclose details of receivables from any officer or principal stockholder if it equal or exceeds some prercentage of total Assets.

No, i don't think that materiality guidlines should be quantifield. Because the FASB cannot assume or predict what information is going to be quantifiably material. I belive it is up to each organisation how they conduct its Guidelines.

The concepts statements discuss the concept of "articulation" between financial statement elements. Briefly summarize the meaning of this term and how it relates to an entity's financial statements:

• Articulation is the act of expressing something in a coherent verbal form, or an aspect of pronunciation involving the articulatory organs.
• The financial statements are not isolated items, they are closely related and flow between each other to give a larger picture of the business’ financial circumstances. Each statement can stand alone to offer a snapshot of the given information. But separately, they do not allow an in depth view of the whole financial state of the company.

• The Relationship Between Financial Statements: Articulation The financial statements are not isolated items, they are closely related and flow between each other to give a larger picture of the business’ financial circumstances. Each statement can stand alone to offer a snapshot of the given information. But separately, they do not allow an in depth view of the whole financial state of the company. The Balance Sheet is directly related to the statement of cash flows, the income statement and the statement of changes in equity. It reports the balances of assets, liabilities and equity at the beginning and ending of the period, increase or decrease in net assets from net profit (income statement) and from net gains (statement of changes in equity), increase or decrease on equity from share capital (statement of changes in equity), decrease in net assets and equity from dividends (statement of changes in equity).
• The Income Statement, also called Profit and Loss Statement, directly links to the cash flow statement, the balance sheet and the statement of changes in equity. The increases or decreases of net assets from the profit and loss as reported in the income statement is also in the balances reported in the balance sheet for the period end. The profit and loss in the income statement are recorded in the cash flow statement. Net profit or loss is reported in the statement of changes in equity.
• The Statement of Changes in Equity directly relates to the income statement and the balance sheet. The statement of changes in equity records the movement of equity as reported in the balance sheet. The change in equity is also reported in the income statement as well as revaluation surplus. The Cash Flow Statement is mostly related to the balance sheet because it reports the effects of changes in cash balances at the beginning and ending of the period.
• The cash flow statement reflects increases and decreases from: changes in share capital reserves, changes in retained earnings from net profit or loss (from the income statement), changes in long term loans, working capital changes reflected in the balance sheet and changes in non-current assets from investing activities. The financial statements present and record a snapshot of the financial health and well-being of the company at a specific reporting period date or ending date.
• They were created and intended to directly relate to each other in order to flow together to show detailed financial information for the reporting period. Yes, you can review each statement separately and glean information, but when to get the whole picture of the reporting period you need to review the statements individually and together as a whole. In the next segment we will discuss the inherent purpose of the financial statements.